Global ambitions

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Federal dollars IT Minister Helen Coonan announced A$36 million
in funding (including $1.9m in running costs) for the ICT
Incubators Program (ICTIP) in August 2004, spanning four years from
June 2004 to June 2008.

However, Gartners Bob Hayward says incubator funding is a
miniscule part of the overall growth and export issue faced by the
local technology industry. Inflated taxes and poor capital
investment remain greater concerns.

Despite spending more on IT than almost all the Association of
Southeast Asian Nations (ASEAN) countries combined - including
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the
Philippines, Singapore, Thailand and Vietnam - Australia has failed
to produce many big IT brands or exports.

Research for MISs annual Strategic 100, conducted in
November on the worlds leading technology vendors and the
brands setting the agenda in computing for the foreseeable future,
uncovered a shocking under-representation of Australian firms.

Only three local companies made the list of 25 Asia Pacific
brands - specialist enterprise resource software manufacturer
Mincom, accounting software developer MYOB and 3G advocate
Hutchison Telecom. This left Australia outranked by Japan, which
touted nine big brand names, India - also with nine - and Singapore
with seven.

The absence of Telstra from the list was perhaps the most
telling of all, highlighting the dire need for local ITC companies
to increase their reach beyond the domestic market. The fact
remains that while a megalith in its home telecommunications and
broadband market, Telstras forays overseas have been
monstrously unsuccessful.

A snapshot of the brands used in Australias server rooms
poses the question of whether CIOs exercise bias against local
brands, and how much this contributes to the failure of Aussie
companies to blossom into global brand names.

Many would argue in the affirmative. Gartner analyst Bob Hayward
is author of How Australias New Government Can Help Its IT
Industry Grow, released last year. Hayward says there is a
"cultural cringe" against Australian products coupled with a
perception that foreign brands are in some way superior.

"Most businesses, politicians, government procurement staff and
ordinary citizens fail to appreciate the size, sophistication,
skills and successes of the Australian technology sector [and]
still look to the US, Japan and other developed nations for
technology innovations and ignore the impressive achievements in
their own backyard."

However, CIOs refute the allegation, saying Australian products
are often preferred for the tighter levels of support available,
providing they make the grade. And this is the clincher. "It is not
an irrational bias," says John Julian, deputy-principal of projects
at the University of Melbourne, who in the course of his career has
put two local brands - Technology One (financial management
software) and Callista (student records software) - through their
paces alongside multinational equivalents.

"Product selections go through an extraordinarily thorough
evaluation process, especially in the public sector, taking into
consideration: functionality, viability of the supplier, depth and
range of the product mix and support."

In the end Julian chose Oracle and SAP over domestic products.
And, while he admits he has to work harder at building the
relationship with these large companies, often being bounced to
call centres in Bangladesh for support, the huge R&D capacity
is hard to ignore, particularly for a big international
university.

In the education community, many point to the questionable
viability of Callista as a classic scenario of why defects should
not be overlooked for the sake of buying homemade brands.
Originally developed out of Deakin University before being spun-off
into a commercial entity, rumours run amok that Callistas big
customers are extremely concerned about the companys
dwindling income and by extension its ability to fund R&D and
extend product roadmaps.

Chief executive officer of Balfours Bakery, Jim OToole,
agrees the R&D component is important. But by the same token he
has used Technology One in a past role over a megalith
multinational (which he requested remain nameless) to develop a
large bespoke application for a manufacturing firm. "To their
credit [the multinational] knocked it back because they said they
couldnt do it at a competitive price, and 10 years later the
Technology One system is still in use."

OToole rejects the assertion that a bias exists against
domestic brands. At the end of the day, he says hed rather
buy local, provided the product or service hes looking for is
up to spec.

Driving for excellence
Still, Hayward says Australia should be concerned about its
stagnating position in the global technology stage.
"Australias IT sector employs more than 200,000 people, has
revenue of more than A$70 billion, contributes more than 8 per cent
of national gross domestic product (GDP) and consists of several
thousand companies, with more than 2,000 of those generating their
own intellectual property (IP) and innovations."

And yet, Hayward says, Australias IT sector has failed to
translate its advantages to the global trade of IT products and
services. The country risks falling further behind other nations
that have been much more aggressive in their IT industry
development strategies.

At the same time, John Brand, senior vice-president of
technology research services for Meta Group, says business
executives should care about Australias position in IT as an
essential infrastructure component that drives excellence in every
other industry, and aggravate for improvements in whatever forums
are available to them. "We see it as an extension of the ICT
portfolio but in actuality its an underpinning to everything
else. [If the IT vision stalls] we all lose because its a
fundamental tool. For too long weve focused on technology as
an industry and missed the opportunity to accelerate every other
industry."

In 2002 the National Office of the Information Economy (NOIE) in
conjunction with the OECD (Organisation for Economic Cooperation)
and the Reserve Bank undertook an economic debate on the link
between ICT and productivity. The subsequent report stated: "The
common emerging view in Australia is that productivity growth in
the 1990s was precipitated by microeconomic reform, but
subsequently was sustained by the significant investment in ICT
that was in itself a response to the competitive pressure unleashed
by microeconomic reform."

Government intervention
The report builds a case for the intervention of government in
leading IT infrastructure outcomes for the benefit of the nation.
Dennis Furini, chief executive of the Australian Computer Society
(ACS), says broadband is a basic instance where government
regulation should have stepped in for the benefit of the nation.
While Korea sports the highest broadband penetration rate in the
world alongside Japan, the US and Canada, Australia has fallen to
20th place out of 30 countries on the OECD 2003 broadband table,
with a penetration rate of 2.65 per hundred inhabitants.

While the cost of rolling out broadband across the geographical
expanse of Australia is incomparable to that of Korea or Japan,
Furini suggests "we could have done better by not diluting
resources in having Optus and Telstra roll-out cables down the same
street".

At the launch of the Federal Governments ICT policy in
September, freshly appointed IT Minister, Helen Coonan,
acknowledged the role of ICT in "improving Australias
productivity and competitiveness and underpinning the record levels
of economic growth delivered by the Howard Government".

Many see promise in her approach. They say she demonstrates a
genuine interest that was absent in both former caretakers of the
ICT portfolio, Daryl Williams and Richard Alston. However, there is
widespread concern that Coonan will become engrossed in imminently
more popular issues - such as changes to media ownership laws and
the sale of Telstra - and sidelined IT innovation.

Finding a niche Tim Cavill, SMB director of SAP Australia New
Zealand says IT is no different to any other industry, we simply
have to pick where we can play to best advantage. "Australia has to
find our microcosm that we believe we can succeed in, to identify
talent and then have the investment community back that
talent."

Cavill rejects the notion that Australian CIOs have a "cultural
cringe" or bias against locally made products, preferring to buy
foreign brands out of a misguided perception that they are
superior. This is despite several opinions to the contrary,
particularly regarding the government sector, which constitutes a
disproportionately large slice of the Australian IT market and,
according to Hayward, is notoriously hard for local brands to sell
into.

While its generally acknowledged that Australians are good
at creative technical innovation, few are keen to come forward with
suggestions about where exploitable niches may lie. However,
Hayward points to enormous opportunities for new IT companies in
systems software, applications software, IT services and business
process outsourcing, as well as in new technologies such as smart
cards, radio frequency identification (RFID) chips and converged
networks.

Furini feels the Department of Communications, IT and the Arts
(DCITA) should play a role in finding larger niches for
Australias IT innovation to thrive in. Mincom founder and
soon to be retired CEO, Alan McElrea, agrees. In particular, he
says DCITA could facilitate the meeting of those people or
companies with problems and those with the potential to develop
solutions. Twenty years ago Mincom found its first customers in the
mining sector by good luck, however the process could have been
eased had the government facilitated some sort of meeting with
companies in the mining sector.

Citing an oft-used example of Australian achievement, Furini
says, "Weve done really well [at exploiting a niche] in the
wine industry... to understand why we cant replicate that in
IT is the question. We have people who are well regarded
internationally, but people themselves are not product and the
product is whats ultimately used."

Historical problems John Houghton, professorial fellow at the
Centre for Strategic Economic Study (CSES) and author of the 2002
report IT Development in Australia - A Strategic Policy Review,
commissioned by the ACS, says the reason the success of the
Australian wine industry cant be replicated lies in history.
"Australias economy is driven by commodity prices. It has
nothing to do with manufacturing. Hence finance people (who control
investment) have expertise in agriculture and mining and very
little knowledge or confidence in electronics or technology. This
makes obtaining capital extremely difficult because it puts a risk
premium on IT firms."

Houghton believes one of the most damaging elements in
Australian politics to IT innovation is the Coalition Government
convention that the Trade Minister is a National Party member,
which skews the agenda towards resources and agricultural
exports.

Starved for capital
"The primary element to work against us is lack of capital," says
Mincoms McElrea. "We bootstrapped ourselves the whole way. We
worked inch by inch, deal by deal. We had to generate brand
recognition through word of mouth." In a way, McElrea says, Mincom
missed the boat. At the time of foundation the only other company
doing ERP software was SAP. "I dont think we could ever
emulate SAPs growth but had we had the capital and the
knowledge to use it properly, Mincom would have been much bigger
than it now is."

Governments response to the struggle for capital has been
to throw money at incubator programs. Coonan has committed A$36
million over the next four years. However, these are widely
recognised as ineffective; often allocated to the glibbest talkers
rather than the most sound business propositions. McElrea says
Mincom never tapped into government grants during its start-up
phase. "The first export development grant we received was in 1998
when the company was already 20 years old and a globally recognised
brand."

The irony of the capital drought is that compulsory
superannuation has resulted in Australians having the highest share
ownership per capita in the world. This means the money is in the
market but not filtering through to IT start-ups. Perhaps a more
viable alternative for DCITA is to engage the financial and
investment community in an educational campaign about the potential
of IT innovation.

The other element of this is encouraging entrepreneurs to hold
onto their IP. "Australia has a long-standing history of selling
off our IP for other people to make a motzer on," says Brand.
"Because there are no viable long term opportunities locally, we
sell our ideas and people offshore. This pattern manifests itself
in other industries and is copied in IT." Tower Technology is a
classic example. One of Australias most successful software
developers, Tower Technology sold out to Vignette for US$125m in
January last year.

Cavill suggests increased capital investment may assist with
this since in the current climate many entrepreneurs are punting
with the family home. "Because its so tough to get venture
capital to grow to the scale of a big player, many entrepreneurs
question how much growth they really need."

Hayward feels the government should also address inhibitive tax
structures and bring them in line with other nations. He says while
Australia pays 30 per cent corporate tax, IT companies in many
other nations pay 20 per cent or less. Other countries also sport
zero-rated capital gains tax to attract investors, while Australian
IT companies have to compete against the attractions of negative
gearing that encourage property investment or franked dividends
offered by established listed companies.

Whats more, Australian IT firms can only claim 125 per
cent of R&D expense against tax and are unable to attract staff
with stock option incentive programs because such programs are
complex and offer few tax advantage.

Export impediments While IT-related exports have risen tenfold
over the last 14 years, with 2004 projections expected to exceed
US$3.7b, Taiwan, with a population similar to Australia, exports
over US$70b each year in IT products and services.

By comparison, Australias IT trade deficit in 2002 and
2003 was a whopping US$10b and growing. This is over four times
what Australia exports in cars, six times what we export in wine
and exceeds the countrys total coal exports. According to the
Australian Bureau of Statistics (ABS) IT makes up 60 per cent of
Australias total annual trade deficit.

Hayward doesnt view this as a danger since imported
products are used to make businesses more efficient and
competitive. However, it is unacceptable for Australia to be a user
of other nations technology and not a producer.

There are several reasons why Australian companies struggle to
make the transition into globally recognised brands, not least of
which is the small domestic market. "The market is big enough to
make it interesting but not small enough to force companies to look
offshore for growth," says Hayward. "Whats more, when
technology firms do venture offshore they often make a poor
selection of initial target markets."

This makes Australia inherently different from countries like
India, which look for export opportunities even before considering
domestic sales. India is expected to generate US$15.9b revenue from
IT software and services this year, 70 per cent of which is
consumed in the US and Europe.

Cavill says this mentality has also worked its way into
Australias business psyche. "The US viewed the internet in
particular as something with which they could conquer the world.
Australia, on the other hand, looked at it as a way to save money,
not to sell their products to the entire world."

Mincoms transition to a global brand was aided by its
ability to piggyback on the mining industry, perhaps the first
truly global industry. "What helped us succeed was that we were
specialists in mining and had street credibility from the start.
Mining was a global industry so we always had an export mindset -
Australia was never big enough for us," says McElrea. The mining
boom in the late 70s and early 80s also helped and can
in some respects be compared to the current commodities boom. One
could argue that MYOB had similar success on the back of the
accounting trade.

Market dynamics
While much of this seems too big-picture to grapple with, a recent
study of 243 CEOs throughout Asia Pacific by IBM identified
changing market dynamics, increased competition and competition
from new sources as the most important market forces they face in
the medium term. The report states: "Free trade agreements signed
with Thailand and Singapore in 2003, and with the US in 2004, will
see competition from businesses in these countries intensify
further. The impact on Australian business of future free trade
deals with China could be even greater. And CEOs around the region,
hungry for growth, will consider few target markets off-limits.
Australias domestic market may be mature and crowded, but it
remains a rich one."

This new dynamic of globalisation is a fundamental break from
Australias typically laid-back mentality to market forces.
Australia, in the last 20 years in particular, has believed as long
as the market is open to competition it will thrive and produce
benefits.

But this belief fails to come together for the benefit of the
country, says Brand. There is no strong policy direction or
government support to develop highly recognised brands. And, at the
end of the day, the global market competes on a brand name
basis.